The foreign exchange platform is complex and a lot of changes are happening in a very short period of time. This is why the day traders use Forex market analysis who use this analysis to determine whether the buying or selling is a good decision. For this, they often use charting tools as well as economic indicators. There are three types of market analysis and the article will review them separately, as well as the best of to analyze the forex market generally.
Types of Forex market analysis
The three main types of forex market analysis are the following:
- Fundamental analysis - fundamental analysis is used to analyze the changes on the market and for that, the involved traders use several indicators, such as interest rate, unemployment, gross domestic product (GDP), and generally, any kind of economic information which is a characteristic of a certain market or a country. If a trader needs the information about EUR/USD currency pairs, more valuable information he/she will be able to find in the European market.
- Technical analysis - technical analysis can be done in two ways - manually and automatically. Within the manual system, traders are using technical indicators and make the decision whether to make a buy or sell step. As for automated analysis, the traders are training the software to give the signal and execute buy and sell decisions. The latter can have the advantage of taking out the behavioral economics from the decisions regarding trade.
- Weekend Analysis - the weekend analysis, on the one hand, is used by the trader to establish a big picture of the certain market in which activities he/she is interested in more. The market is closed these days and you do not have to react to certain events, you are just able to observe. On the other hand, weekend analysis is giving hands in terms of making the future week’s trading plan and establishing a kind of necessary mindset. Making a trading plan is a very important step and there are certain aspects that have influence over it, for example, analyzing the most important economic indicators in Forex helps to draw up a valid plan. This helps to discover how they can impact the currency exchange rates. Certainly, there are dozens of different metrics to estimate the economic performance of any nation. As the events are happening daily and the market is closed on the weekend, it gives the trader the best opportunity to think about it and make a thoughtful decision.
The ways to analyze the Forex Market
There are several ways that will help to analyze the forex market in a more efficient way.
- Understanding of the drivers.
The key to successful trading is to analyze the market relationships and the reasons, why, and how they interact. The main thing is to understand the causes and the reasons for this kind of relationship and act accordingly. There are many drivers behind the market actions and it is good to have a thorough understanding and knowledge of the events that are happening and might be standing behind the market actions.
- Chart the indexes
It is very important and helpful for the trader to chart the important indexes for each market and it should be spread over a long period of time, in order for the information to cover every single detail. This exercise can help a trader to determine relationships between markets and whether a movement in one market is inverse or in concert with the other.
- Look for a Consensus
In looking for a Consensus we mean in other markets, if they are reaching a turning point or not. From there, we can use it for our own good to enter a trade in an instrument that will be affected by the turn, and choosing the proper instrument is the key in this case. For example, if the USD/JPY currency pair shows an oversold position and that the Bank of Japan (BOJ) could mediate to weaken the yen, Japanese exports could be modified. However, a Japanese recovery is likely to be reduced without any weakening of the national currency.
- Time the traders
If a trader finds the way for the turning point in a long-term frame is a very successful move. If not so, then it is important to switch to a shorter time period. A perfectly organized plan, discipline, lifestyle commitment, and long working hours will help to be different from the usual traders who are not acting according to the market, they are operating on.
Finally, to sum up, there are a huge number of traders on the forex market and not all of them in succession. As we have seen from the review above, an important action, which traders should make, among other things, is to analyze the forex market thoroughly and most importantly, should know the main tools how to do that. It is no surprise that the market is changing in a very short period of time and the analysis done several days ago, may not be corresponding to the actual situation. The first is to analyze, what type of analysis you are going to use for your trading plan in order to make the process more efficient and the second step is to follow the plan accordingly. Constant attention and keeping up with the daily changes is a very important key to the success of the trading process which every single successful trader has taken into account.